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The Eighth Circuit - A loan is antecedent to the transfer of a security interest when the security interest was not perfected within the time period provided by Section 547(e).

Wells Fargo Home Mortg., Inc. v. Lindquist, 592 F.3d 838 (January 11, 2010)

The U.S. Court of Appeals for the Eighth Circuit affirmed a lower court ruling and held that because the transfer of the mortgage was preferential, the bankruptcy court did not err in avoiding the transfer and ordering the company to pay the bankruptcy estate the value of the mortgage. Appellee, a Chapter 7 bankruptcy trustee (“Trustee”)for the bankruptcy estate of Dean Harold Westlund (“Debtor”), sued appellant mortgage company Well Fargo Home Mortgage Inc. (“Well Fargo”) under Sec. 547 to avoid the pre-petition transfer of a mortgage from the Debtor to Well Fargo. The Bankruptcy Court granted summary judgment in favor of the Trustee and ordered Well Fargo to pay the bankruptcy estate $ 190,808.71. The United States District Court for the District of Minnesota affirmed.

On May 16, 2003, Wells Fargo loaned the Debtor $ 196,000 in exchange for a promissory note in that amount. The Debtor also granted Well Fargo mortgage on his home as security for the note. Subsequently, on October 14, 2005, the Debtor filed a petition for Chapter 7 bankruptcy relief. Although Wells Fargo never recorded the mortgage, the Debtor erroneously listed Wells Fargo as a secured creditor. On the date the Debtor filed for bankruptcy, the unpaid principal balance on the note was $ 190,808.71.

Soon after the Debtor filed his bankruptcy petition, Wells Fargo sold a bundle of 334 mortgage loans to EMC Mortgage Corporation (“EMC”). In this transaction, Wells Fargo "assigned, sold and transferred" its rights under the Debtor's note and mortgage to EMC. On March 7, 2006, the Bankruptcy Court granted the Debtor a discharge and closed the case on March 20, 2006. On or about October 11, 2006, EMC recorded the mortgage. Subsequent to that, the trustee learned that Wells Fargo had not recorded the mortgage before the Debtor filed his bankruptcy petition, which meant that Wells Fargo should have been listed as an unsecured creditor in the petition instead of a secured creditor. At the trustee's request, the bankruptcy court reopened the case on January 29, 2007.

On April 17, 2007, the Trustee filed a complaint against Wells Fargo in Bankruptcy Court, seeking to avoid the debtor's grant of the mortgage to Wells Fargo. The trustee argued that Section 547(e)(2)(C) deems the transfer of the mortgage to Wells Fargo to have occurred immediately before the Debtor's October 14, 2005 bankruptcy filing because Wells Fargo had not perfected its security interest in the property by recording the mortgage before the Debtor filed for bankruptcy. The Bankruptcy Court granted the trustee's motion for summary judgment and held that the transfer of the mortgage occurred immediately before the Debtor's October 14, 2005 bankruptcy filing by operation of Section 547(e)(2)(C).

Upon appeal, the Eight Circuit held that because Wells Fargo failed to record the mortgage, Section 547(e)(2)(C) deemed the transfer of the mortgage to have occurred immediately before the Debtor filed his bankruptcy petition. Thus, the Debtor did not transfer the security interest in his home on account of that debt until immediately before the bankruptcy filing. Under these circumstances, Wells Fargo was already a creditor of the Debtor when it received the mortgage from the Debtor, so the mortgage was transferred "to or for the benefit of a creditor."Moreover, the transfer of the mortgage was "for or on account of an antecedent debt owed by the debtor before such transfer was made," because the debtor was deemed to have transferred the mortgage more than two years after incurring the debt on the note.

Wells Fargo also argued that the Bankruptcy Court erred in ordering it to pay $ 190,808.71 to the Debtor's bankruptcy estate. It asserts that the record creates a genuine issue of material fact about the value of the mortgage because the record contained no evidence of how much EMC paid Wells Fargo for the mortgage. The Court rejected this argument and considered the trustee’s evidence that the Debtor owed Wells Fargo $ 190,808.71 on the date he filed for bankruptcy. The Court further held that Wells Fargo had failed to provide admissible evidence about the transaction between Wells Fargo and EMC. Instead, Wells Fargo's attorney submitted an affidavit stating that Wells Fargo has been unable to determine how much EMC paid for the mortgage because it was sold as part of a bundle of mortgages. Since Wells Fargo failed to present any evidence about the value of the mortgage, the Court concluded that Wells Fargo has failed to establish a genuine issue of material fact about the value of the mortgage.

The Court further ruled that since the transfer of the mortgage was preferential, the bankruptcy court did not err in avoiding the transfer and ordered Wells Fargo to pay the bankruptcy estate the value of the mortgage.